After four days of furious buying by mainland institutional equity investors, the Hong Kong market had a down day today. This comes despite continuing healthy money inflow from the Shanghai-Hong Kong Stock Connect mechanism. Although I didn’t watch the market closely (too late in the night for me), it seems as if sellers emerged in force in the afternoon when mainland money was unable to push the market much higher in the morning.

As one might expect, the big winners of the past week were the big losers of today.

Although I feel no overwhelming need to buy tomorrow, it looks to me that Stock Connect will end up setting a higher floor under China-related shares in Hong Kong than was possible when locals and US/EU international investors were the main participants in the market.

I’ve been a bit bemused at media surprise that many Hong Kong heavyweights have not participated in the rally. The stocks in question have at least one of the following characteristics:

1. they have broad global exposure but no particular focus on China,

2. they’re controlled by UK interests and continue to be symbols of former colonial rule, and/or

3. in the case of the “hongs” or trading companies, they are the 21st century form of the British-owned opium companies that were Hong Kong’s mainstay in the nineteenth century. During the Opium Wars of the mid-1800s, Britain invaded China, forcing legalization of trade in the narcotic and effectively seized of Hong Kong Island and a chunk of the mainland from Beijing. Companies strongly connected with this national humiliation are the last firms mainland investors are likely to buy!

What stocks are mainlanders buying? They’re what one would expect:

–companies dually listed in Hong Kong and China, but trading at a discount in Hong Kong

–companies with attractive businesses in China, but listed only in Hong Kong.

Trading over the next few days will likely give us a better idea of the staying power and price sensitivity of mainland investors. For me, the key question is whether Stock Connect buyers will let prices drift down before reentering.